Konstantinos Stathopoulos

Compensation consultants and CEO pay: UK evidence

This paper provides new evidence on the effect of compensation consultants on CEO pay. We show that the use of a compensation consultant has an increasing effect on the level of total CEO compensation, which is consistent with the “ratcheting up” effect of consultants on CEO pay argued by the managerial power approach. However, we also find that this influence on pay levels mainly stems from an increase in equity based compensation. In contrast, we report a negative influence of consultants on basic (cash) pay.We also show that economic determinants, rather than CEO power, explain the decision to hire compensation consultants. The results are robust to several model specifications, different controls for firm and governance characteristics and tests for selection bias. Overall, we offer new evidence suggesting that pay consultants contribute to the solution of the executive pay determination problem and are not part of the problem; our results cast doubts on the conclusions of the managerial power approach regarding the role of compensation consultants.

Executive Compensation and the Split Share Structure Reform in China

The split share structure reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more strongly related to share price movements. We predict that this reform will create remuneration arrangements that strengthen the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing that there is such an effect among state-controlled firms, and especially those where the dominant shareholders have a greater incentive to improve share return performance. Our results indicate that this reform strengthens the accountability of executives to external monitoring by the stock market, and therefore benefits minority shareholders in China.

What Are Friends for? CEO Networks, Pay and Corporate Governance

We investigate the impact of CEO networking on compensation arrangements. Unlike existing studies that are largely based on board interlocks, we use a unique measure that calculates the direct ties the CEO has created during her life. We show that a CEO’s compensation is significantly affected by her power in the managerial labour market. We find that the size of the CEO network is positively related to the level of CEO compensation and inversely related to its pay-performance sensitivity. We interpret our results as direct evidence that managerial power influences compensation. However, in firms where shareholders rights are well protected, the impact of the CEO network over pay arrangements diminishes. This implies that outrage cost and governance reduces managerial power in pay negotiation. Overall, our results are consistent with the predictions of the managerial power approach.

Managerial Incentives, Risk Aversion, and Debt

We investigate the risk choices of risk-averse CEOs. Following recent theoretical work, we expect CEO risk aversion to be more pronounced in firms with high leverage or high default probability. We find that the CEOs of these firms reduce firm risk, even in the presence of strong risk-taking incentives. Our results are robust to controls for the sensitivity of CEO wealth to stock price changes, firm risk determinants, the endogenous feedback effects of firm risk on CEO incentives, unobserved firm and market effects, and debt governance. The impact of CEO risk aversion is economically significant.

Cash holdings and employee welfare

This paper examines the relation between employee welfare practices and corporate cash holdings. We find firms that are strongly committed to employee well-being, measured by ratings on employee relations, to hold more cash. The effect of employee welfare standards on cash holdings is stronger for firms in human-capital-intensive, competitive, and high-labor-mobility industries in which employees are more important to their businesses. These results are consistent with the predictions of the stakeholder theory. Overall, our paper provides novel evidence on the role human capital and employee relations play in a firms cash management policy.

Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?

We examine the relation between executive compensation and market-implied default risk for listed insurance firms from 1992-2007. Shareholders are expected to encourage managerial risk-sharing through equity-based incentive compensation. We find that long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option-based incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.

The Importance of Shareholder Activism: The Case of Say-on-Pay

Manuscript Type Review Research Question/Issue This study focuses on the role of Say-on-Pay as a mechanism that aims to promote the efficiency of corporate governance by providing an additional channel for the expression of shareholder “voice.” Initially introduced in the UK, Say-on-Pay has subsequently been adopted in a large number of countries and it has recently received significant attention from regulators, media, and the general public. The purpose of this study is to review prior literature related to Say-on-Pay and its impact on firm value and corporate decision making. Research Findings/Insights Our study highlights the interdisciplinary nature of research on Say-on-Pay. We also shed light on conceptual gaps and empirical discrepancies in prior studies, indicating that many questions linked to Say-on-Pay and its importance for the executive pay-setting process remain largely unanswered. Theoretical/Academic Implications At a theoretical level, we highlight potential areas for development of the existing theoretical framework for Say-on-Pay, which is at present rather limited and primarily influenced by agency theory. At an empirical level, we propose a substantial number of avenues for fruitful future research on this topic. Practitioner/Policy Implications In the light of recent proposals for extending the role of Say-on-Pay within the corporate governance framework, our findings are particularly relevant to regulators. More thought is needed about changing its nature from advisory to binding, as the degree of its effectiveness and the dynamics of the voting process are still unclear. Our study could also be informative for the media and the general public, especially given the increasing attention afforded to Say-on-Pay.

The Impact of Investor Horizon on Say-on-Pay Voting

Shareholder investment horizons have a significant impact on say-on-pay voting patterns. Short-term investors are more likely to avoid expressing opinion on executive pay proposals by casting an abstaining vote. They vote against board proposals on pay only in cases where the CEO already receives excessive pay levels. In contrast, long-term investors typically cast favourable votes. According to our findings, this is due to effective monitoring rather than collusion with the management. Overall, investor heterogeneity in terms of investment horizons helps explain say-on-pay voting, in particular the low levels of say-on-pay dissent, which have recently raised questions over the efficiency of this corporate governance mechanism.

UK Executive Stock Option Valuation: A Conditional Model

We value UK executive stock options (ESOs) as American options that are awarded conditional on the probability of the holders achieving some performance criteria. Unlike the standard Black and Scholes (BS) model, which is universally used both in the literature and practice, this provides a more realistic representation of UK ESOs. We show that UK ESOs actually have less value and contain more incentives than they appear under the BS approach. Specifically, we observe a 17 per cent average discount in the value of the ESOs when compared to their BS value. In addition, we find significantly higher incentive levels when we measure the sensitivity of the options using the hedge ratio, i.e. the options delta. We argue that these findings have implications for two contemporary debates in the UK, i.e. the substitution of ESOs by Long-Term Incentive Plans (LTIPs) and the discounting of ESO value from company profits.

Strategic distortions in analyst forecasts in the presence of short-term institutional investors

We document that analysts cater to short-term investors by issuing optimistic target prices. Catering dominates among analysts at brokers without an investment banking arm as they face lower reputational cost. The market does not see through the analyst catering activity and their forecasts lead to temporary stock overpricing that short-term institutional investors exploit to offload their holdings to retail traders. We also report evidence consistent with catering brokers being rewarded with more future trades channelled through them. Our study identifies a new source of conflicts of interest in analyst research originating from the ownership composition of a stock.